The Financial Industry Regulatory Authority is proposing all-public arbitration panels in a rule it is filing with the Securities and Exchange Commission next month, following a two-year pilot program.
The idea is to increase public confidence in Finra's regulation of its members.
"Any investor will have the power to have his or her case heard by a panel with no industry participants," Richard Ketchum, Finra's chairman and CEO, said in a statement.
That is a big problem for advisers, according to some industry observers.
"The average person doesn't know much at all about the investment world," said Rick Rummage, president of recruiting firm The Rummage Group in Reston, Va. "It's already a nightmare of advisers. Of course you should hold bad advisers liable, but arbitration can ruin a good adviser's career over a single complaint. I can't tell you how many advisers I can't move because of a bogus complaint, and the firm just decided to settle."
Rummage maintains that while there are some bad apples, the majority of cases come about simply because an investor lost money and wants it back.
Heywood Sloane, the managing director of the Bank Insurance and Securities Association, added that the more public the process, the more likely it is that firms will settle sooner, regardless of the merits of the case. "Firms will definitely settle faster, and if that besmirches an adviser unfairly, that's not a good thing."
However, Alan Foxman, a Boca Raton, Fla., attorney, who spent eight years working in Finra's enforcement division, said brokers might receive more sympathy outside the industry. "Industry guys tend to be tougher on firms and reps than non-industry people," he said. "As an attorney, I, too, might be harsher on another attorney for giving my industry a black eye, or for doing things differently than I would."
On the whole, Foxman doubts all-public panels will make much difference. Arbitration panels currently consist of two members of the public and one industry insider, who might be a retired broker or an attorney who works with brokerage firms. That insider may be as unfamiliar with a new investment product or process as the public arbitrators.
Foxman adds that it is not very likely the number of firms settling will rise — under the current system 80% of firms settle, so realistically it can't go not much higher.
Chris Hickman, a former wirehouse broker who is now an independent adviser with Multi Financial Services in Del Ray Beach, Fla., said that rather than tweak the system for the sake of appearances, the entire process should be scrapped. "The whole Finra system is a farce," he said. "Nobody's under oath; anyone can make anything up, and they're not accountable for it, and then it goes on the broker's record forever. It's not exactly fair."
Hickman maintains that Finra's arbitration procedure is set up not to protect investors from bad advisers, or good advisers from false allegations. The firms whose membership fees pay for Finra "just settle and throw the adviser under the bus," he said. "I'd rather have a regular court system where everyone's under oath."
